Corporate and
Business Law
(Pakistan
2009
Fundamentals Level – Skills Module
The Association of Chartered Certified Accountants
Time allowed
Writing: 3 hours
ALL TEN questions are compulsory and MUST be attempted
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.
ALL TEN questions are compulsory and MUST be attempted
1 Under the Constitution of Pakistan, 1973, explain the process of passing legislation in the Parliament (Majlis-e-
Shoora).
(10 marks)
Solution:
The Parliament comprises (i) the President; (ii) the National Assembly (the lower house); and (iii) the Senate (the upper house) –
Article 50 of the Constitution of Pakistan
laws for the proper governance of the country. The process of passing legislation in the Parliament is set out in Articles 70–75 of the
Constitution as under:
Ordinary Bills
A Bill (other than a Money Bill) with respect to any matter in the Federal Legislative List and the Concurrent Legislative List given in
the 4th Schedule to the Constitution may originate in either House and, if it is passed by the said House, it is to be transmitted to the
other House. If the Bill is also passed without amendment by the other House it shall be presented to the President for his assent.
If, however, the Bill so transmitted is either rejected or is not passed within 90 days of its receipt or is passed with amendment, the
Bill at the request of the originating House is referred to a Mediation Committee constituted within 15 days of reference.
Mediation Committee
A Mediation Committee comprises of eight nominees of each house. The Mediation Committee formulates, within 90 days of the
aforesaid reference, a draft Bill likely to be passed by both houses and places the same before each House separately. If it is passed
by both, it is forwarded to the President for his assent.
Money Bills
A Money Bill is one which pertains to matters identifi ed in Article 73 including imposition of taxes and borrowing of money by the
Federal Government, etc. The Speaker of National Assembly conclusively decides the status of a Bill as a Money Bill. A Money Bill
originates in the National Assembly only. Simultaneously, a copy thereof is placed before the Senate for its recommendations. Such
recommendations may or may not be accepted by the National Assembly. After passage from National Assembly, the Money Bill is
presented for the President’s assent.
Presidential Assent
The President may within 30 days of receiving a Bill either assent to it or return the Bill (other than Money Bills) to the Parliament
with recommendations for reconsideration. If the Parliament passes the Bill again with or without amendment, the President may
not withhold his assent to the same.
Upon receiving the President’s assent, a Bill becomes an Act of Parliament.
2 Under the law of contract:
(a) defi ne and distinguish between a ‘proposal’ (offer) and an ‘invitation to treat’; and (6 marks)
(b) defi ne ‘consideration’ and discuss its importance in the formation of a contract. (4 marks)
(10 marks)
Solution:
(a) Section 2(a) of the Contract Act, 1872 (‘Contract Act’) provides that when a person signifi es his willingness to do or to abstain
from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal.
The word ‘proposal’ is used in the Contract Act in the same sense as the word ‘offer’ is used in English law. To have made a
proposal, a person must have: (i) signifi ed to another his willingness to do or to abstain from doing anything; and (ii) have
done so with a view to obtaining the assent of that other to such act or abstinence. The test of a person’s intention in making
a proposal is an objective one, i.e., as it would be reasonably construed by a person in the position of the one to whom the
proposal (offer) is addressed.
A communication by which a party is invited to make an offer is commonly called an ‘invitation to treat’. It is distinguishable
from a ‘proposal’ (offer) primarily on the ground that it is not made with the intention that it shall become binding as soon as the
person to whom it is addressed simply communicates his assent to its terms. Examples of invitation to treat include invitations
for bids/tenders for supply of goods or services or advertisement and other displays, etc.
(b) Section 2(d) of the Contract Act provides that ‘When, at the desire of the promisor the promisee or any other person who has
done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such
act, abstinence or promise is called a consideration for the promise’.
Section 25 brings forth the importance of consideration by providing that an agreement made without consideration is void,
i.e. it never becomes a legally enforceable contract. Similarly, signifi cance of consideration in English law is expressed as a
requirement: that for parties to be able to enforce a promise, they must have given something ‘quid pro quo’ for it: something
must be given or promised in exchange or return for the promise.
The importance of consideration also lies in the fact that law makes a distinction between a gratuitous promise and a contract.
In a gratuitous promise, one party agrees to do something for free or without reward. In contrast, a contract is essentially a
bargain in which each party gets something in return for his or her promise to perform the obligation in the contract. The price
paid in return for the promise is called consideration. Without consideration, there is no contract. Further, consideration in a
contract must also be legal. If consideration is illegal, a contract is unenforceable.
3 Under the Companies Ordinance, 1984:
(a) defi ne a ‘private company’; (3 marks)
(b) defi ne a ‘listed company’; and (3 marks)
(c) explain and distinguish between a ‘company limited by shares’ and a ‘company limited by guarantee’.
(4 marks)
(10 marks)
Solution:
(a) Section 2(28) of the Companies Ordinance, 1984 (‘Ordinance’) defi nes a ‘private company’ as one which, by its articles of
association:
(i) restricts the right to transfer its shares, if any;
(ii) limits the number of its members to 50 not including persons who are in the employment of the company; and
(iii) prohibits any invitation to the public to subscribe to the shares, if any, or debentures of the company.
(b) Section 2(20) defi nes a ‘listed company’ as a company or a body corporate or other body whose securities are listed.
Section 2(19) defi nes ‘listed‘ in relation to securities to mean the securities which have been allowed to be traded on the stock
exchange.
Section 2(34) defi nes ‘security’ to mean any share, script, debenture, participation term certifi cate, modaraba certifi cate,
musharika certifi cate, term fi nance certifi cate bond, pre-organisation certifi cate or such other instrument as the Federal
Government may, by notifi cation in the offi cial Gazette, specify for the purpose.
Accordingly, a listed company is a company or body corporate whose securities have been allowed to be listed and traded on
the stock exchange. By virtue of no restriction on the transfer of its shares, it is a public company.
(c) Section 2(8) of the Ordinance defi nes a ‘company limited by shares’ as a company having the liability of its members limited
by the memorandum to the amount if any unpaid on the shares respectively held by them.
Section 2(9) defi nes a ‘company limited by guarantee’ as a company having the liability of its members limited by the
memorandum to such amount as the members may respectively thereby undertake to contribute to the assets of the company
in the event of its winding up. Under the Ordinance guarantee companies may also have a share capital.
Accordingly, in a company limited by shares, the liability of the member may have to be implemented at any time during the
existence of the company, during the lifetime as well as during the winding up. Although by virtue of s.91 of the Ordinance,
which prohibits issuance of partly paid up shares, effectively the liability of such member stands implemented at the time of
issuance of the relevant shares to him/her/it. By contrast, in a guarantee company that liability need only be implemented after
the commencement of the winding up of the company and even then subject to certain conditions.
In the peculiar case of a company limited by guarantee and having a share capital, the two kinds of liabilities discussed above
would be present at the same time.
4 Explain the composition and role of an ‘audit committee’ as provided under the Code of Corporate Governance.
(10 marks)
Solution:
The Code of Corporate Governance (‘Code’) aims to institute best practices in the corporate sector with a view to safeguarding the
interests of all stakeholders. In this regard, great emphasis is laid on the audit procedures and requirements. One of the steps in this
regard is the requirement of establishment of an audit committee by the board of directors of every listed company.
Composition:
The Code stipulates that the audit committee is to comprise not less than three members, including the chairman. The majority of
the members of the committee are to be from among the non-executive directors of the listed company and the chairman of the audit
committee shall preferably be a non-executive director. The names of members of the audit committee are to be disclosed in each
annual report of the listed company.
Role:
The Code stipulates that the board of directors of every listed company shall determine the terms of reference of the audit committee.
The audit committee shall, among other things, be responsible for recommending to the board of directors the appointment of external
auditors by the listed company’s shareholders and shall consider any questions of resignation or removal of external auditors, audit
fees and provision by external auditors of any service to the listed company in addition to audit of its fi nancial statements. In the
absence of strong grounds to proceed otherwise, the board of directors shall act in accordance with the recommendations of the
audit committee in all these matters.
The terms of reference of the audit committee shall also include the following:
(a) determination of appropriate measures to safeguard the listed company’s assets;
(b) review of preliminary announcements of results prior to publication;
(c) review of quarterly, half-yearly and annual fi nancial statements of the listed company, prior to their approval by the board of
directors, focusing on:
(i) major judgmental areas;
(ii) signifi cant adjustments resulting from the audit;
(iii) the going-concern assumption;
(iv) any changes in accounting policies and practices;
(v) compliance with applicable accounting standards; and
(vi) compliance with listing regulations and other statutory and regulatory requirements.
(d) facilitating the external audit and discussion with external auditors of major observations arising from interim and fi nal audits
and any matter that the auditors may wish to highlight (in the absence of management, where necessary);
(e) review of any management letter issued by external auditors and management’s response thereto;
(f) ensuring coordination between the internal and external auditors of the listed company;
(g) review of the scope and extent of internal audit and ensuring that the internal audit function has adequate resources and is
appropriately placed within the listed company;
(h) consideration of major fi ndings of internal investigations and management’s response thereto;
(i) ascertaining that the internal control system including fi nancial and operational controls, accounting system and reporting
structure are adequate and effective;
(j) review of the listed company’s statement on internal control systems prior to endorsement by the board of directors;
(k) instituting special projects, value for money studies or other investigations on any matter specifi ed by the board of directors, in
consultation with the chief executive and to consider remittance of any matter to the external auditors or to any other external
body;
(i) determination of compliance with relevant statutory requirements;
(m) monitoring compliance with the best practices of corporate governance and identifi cation of signifi cant violations thereof; and
(n) consideration of any other issue or matter as may be assigned by the board of directors.
5 Under the Companies Ordinance, 1984:
(a) explain the meaning of voluntary winding up; (2 marks)
(b) identify the different types of voluntary winding up; (2 marks)
(c) explain the following steps in the voluntary winding up process:
(i) declaration of solvency; (2 marks)
(ii) members’ special resolution; (2 marks)
(iii) creditors’ special resolution. (2 marks)
(10 marks)
Solution:
(a) Winding up of a company is the process whereby its business is wound up and its assets are realised and distributed amongst
its creditors and/or contributories. Section 297(1) of the Companies Ordinance, 1984 (‘Ordinance’) provides that the winding
up of a company may be either: (i) by the court; or (ii) voluntary; or (iii) subject to the supervision of the court. ‘Voluntary’
winding up (‘VWU’) is essentially a winding up process initiated by the members/shareholders (and in some cases also the
creditors) of the company without the involvement of the court. However, the court may, on a petition by person specifi ed in
s.309, and if it is satisfi ed that the voluntary winding up cannot be continued with due regard to the interests of the creditors or
contributories or both, pass an order of winding up so as to effectively ‘take-over’ the on-going voluntary winding up process.
(b) The Ordinance provides for two types of voluntary winding up: the members’ voluntary winding-up (‘MVWU’) and the creditors’
voluntary winding up (‘CVWU’). MVWU involves the members only, while in the CVWU, in addition to the members, the
creditors are also involved. The more important differences between MVWU and CVWU include the requirement (in MVWU
only) on the part of the directors to make a declaration of solvency declaring that the company either has no debts or that within
one year of the initiation of the winding up all debts will be paid off (‘DoS’), while in CVWU this is not required. Furthermore,
to initiate and conclude both types of winding up, only a general meeting of the members of the company is required, however,
in CVWU, an additional meeting of the creditors is also required.
(c) (i) Declaration of Solvency: In MVWU only, DoS is made and verifi ed by an affi davit and fi led with the company registration
offi ce. DoS must be accompanied by a copy of the report of the company’s auditors prepared under the Ordinance, on the
profi t and loss account of the company for the period commencing from the date up to which the last such account was
prepared and ending with the latest practicable date immediately before the making of the declaration and the balance
sheet of the company made out as on the last mentioned date and also embodying a statement of the company’s assets
and liabilities as at that date.
(ii) Members’ Resolution/Special Resolution: Section 358 of the Ordinance provides that VWU may be undertaken on the
basis of a resolution in a general meeting of the company, when the period (if any) fi xed for the duration of the company
by its articles of association expires, or the event (if any) occurs, on the occurrence of which the articles provide that the
company is to be dissolved; or, if the company resolves by special resolution that the company be wound up voluntarily.
The resolution or special resolution, as the case may be, has to be passed within fi ve weeks of the date of making of the
DoS (s.362) at a general meeting of the company duly convened by giving at least 21 days’ notice.
The VWU is deemed to have commenced upon the passage of the resolution/special resolution (s.359).
(iii) Creditors’ Resolution: In CVWU only, in addition to the members’ meeting, a meeting of the company’s creditors is also
called for the day, or the day next following the day, on which resolution/special resolution for VWU is to be proposed
(s.373).
The directors and chief executive of the company shall (a) cause a full statement of the position of the company’s affairs
and assets and liabilities together with a list of the creditors of the company and the estimated amount of their claims to
be laid before the meeting of creditors to be held as aforesaid; and (b) appoint one of their numbers to preside at the said
meeting.
Notice of any resolution passed at a creditors’ meeting is to be given by the company to the Registrar of Companies within
10 days of the passing thereof.
6 Under the Contract Act, 1872:
(a) defi ne an ‘agent’ and a ‘principal’; (2 marks)
(b) identify the ways in which an agency relationship may be created; and (3 marks)
(c) discuss the extent of an agent’s authority. (5 marks)
(10 marks)
Solution:
(a) Section 182 of the Contract Act, 1872 (‘Contract Act’) defi nes an ‘agent’ as a person employed to do any act for another or to
represent another in dealings with third persons.
The ‘principal’ is the person for whom such an act is done, or who is so represented.
(b) The relationship of principal and agent is a particular type of contract called ‘agency’. Agency may be constituted:
(i) by express appointment by the principal or by a person duly authorised by the principal to make such an appointment;
(ii) by implication of law, from the conduct or situation of the parties or from necessity of the case; or
(iii) by subsequent ratifi cation by the principal of acts done on his behalf.
10
(c) Section 188 of the Contract Act provides that an agent having an authority to do an act, has authority to do every lawful thing
necessary in order to do such act. Similarly, an agent having authority to carry on business, has authority to do every lawful
thing necessary for the purpose, or usually done in the course, of conducting such business.
An agent is bound to act within four corners of authority conferred by principal (WAPDA v Ice Pak International Consulting
Engineers of Pakistan
of protecting his principal from loss as would be done by a person of ordinary prudence.
If an agent acts beyond his authority, the principal is not bound by the act. However, if the principal accepts the benefi t of the
act, he will have ratifi ed the act. If the agent is held out by the principal as having authority to do a particular act, the principal
would be bound by the act even if it was, in fact, beyond the authority of the agent.
7 Under the labour laws of Pakistan
(a) explain the concept of ‘workman’; (3 marks)
(b) with reference to the Workmen’s Compensation Act, 1923 state:
(i) the purpose of the Act; and (3 marks)
(ii) the scope of the employer’s liability under the Act. (4 marks)
(10 marks)
Solution:
(a) The expression ‘workman’ as used in the principal labour legislations generally refers to a person employed to do skilled or
unskilled manual or clerical work. It may be contrasted with the concept of ‘managerial’ staff performing managerial tasks. The
superior courts have held that the real test of whether a person is a workman or not depends on the nature of duties performed
by him and not by his designation or salary.
Workmen enjoy various benefi ts and protections under the employment/labour laws such as the Industrial and Commercial
Employment (Standing Orders) Ordinance, 1968 (providing for provident fund/gratuity, procedure for termination, payment of
bonuses, etc) and the Workmen’s Compensation Act, 1923 (providing for compensation in case of accidents). Employers of
workmen are mandatorily required to comply with the relevant provision of such laws. The labour/employment laws referred to
above prevail over any inconsistent provisions in the mutual contracts between employers and workmen.
(b) (i) The Workmen’s Compensation Act, 1923 (‘WCA’) aims to provide for the payment by certain classes of employers to
their workmen of compensation for injury by accident. This compensation under WCA is a statutory tortuous remedy. The
rates of compensation payable for various types of injuries are fi xed under the WCA. The underlying spirit of WCA is that
workmen suffering any tortuous injuries should, in so far as it is possible and subject to the provisions contained therein,
be saved from the rigours of regular trials before civil courts in torts (Kalsoom Akhtar v Abdur Rashid – PLD 1975 Lahore
244).
(ii) Section 3(1) of WCA provides that if personal injury is caused to a workman by an accident arising out of, and in the
course of, his employment, his employer shall be liable to pay compensation in accordance with the WCA.
The proviso to s.3(1) excludes the employer’s liability:
(i) in respect of any injury which does not result in the total or partial disablement of the workman for a period
exceeding four days;
(ii) in respect of any injury not resulting in death caused by an accident which is directly attributable to the workman
being under the infl uence of drugs or drink (alcohol); his wilful disobedience of an order expressly given or of a rule
expressly framed for the safety of workmen; or his wilful removal or disregard for any safety guard or other device
which he knew to have been provided for the purpose of workmen’s safety.
8 Mohsin Knitwear Limited (‘MKL’), a public unlisted company, earned a substantial profi t. It declared a dividend of
Rs. 5·00 per share at its annual general meeting held last week. Today, MKL has received an order from a regular
customer for the supply of large quantities of knitted garments. The board of directors wants to utilise all available
funds, including MKL’s profi ts, for buying raw material to meet the order. Accordingly, the board of directors wants to
delay the payment of the dividends to the shareholders until completion of the order.
Required:
With reference to the Companies Ordinance, 1984, advise the board of directors whether the payment of dividends
can be delayed.
(10 marks)
Solution:
In this area the general rule is laid down in s.251(1) of the Companies Ordinance, 1984 which provides that when a dividend
has been declared it shall not be lawful for the directors or the company to withhold or defer its payment and the chief executive
of the company shall be responsible for making the payment within 30 days of the declaration of a dividend in case of an unlisted
company. On the given facts, the date of declaration would be the date of the annual general meeting. Section 252(2) provides
that where a dividend has been declared but is not paid within the period specifi ed in sub-section (1), the chief executive of the
company shall be punishable with imprisonment for a term which may extend to two years and with a fi ne which may extend to
Rs. 1,000,000.00.
On the given facts, if the declared dividend has been validly declared (i.e., by the company within the limits recommended by the
board of directors and payable out of profi ts alone) but is not paid within the statutory time period of 30 days, this may entail the
statutory penalties under s.251(2) for the chief executive of MKL.
However, these penal consequences may be avoided if the permission of the Securities and Exchange Commission of Pakistan
(‘SECP’) to delay payment of the dividend is obtained on the basis of an application by the company in the prescribed form
(Form 35). Such application must be fi led within the aforesaid 45 days period and would be decided by the SECP only after hearing
the concerned stakeholders, i.e. the shareholders entitled to the dividend. Such application may only succeed if the company’s case
falls within the following grounds set out in the proviso to s.251(2):
(a) the dividend could not be paid by reason of the operation of any law;
(b) a shareholder has given directions to the company regarding the payment of the dividend and those directions cannot be
complied with;
(c) there is a dispute regarding the right to receive the dividend;
(d) the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder; or
(e) for any other reason, the failure to pay the dividend or to post the warrant within the period aforesaid was not due to any default
on the part of the company.
9 Tariq, Jamal and Ali are the only three shareholders of Magic Carpets (Private) Limited (‘MCPL’). They were elected
as the directors of MCPL at the annual general meeting held in October 2008. Tariq resigned as director in November
2009. At a recent meeting of the board of directors, Jamal proposed that Qasim should be appointed as a director in
place of Tariq for a period of six months. Ali opposed this proposal stating that he thinks that under the law they cannot
appoint a replacement director.
Required:
With reference to the Companies Ordinance, 1984, advise the board of directors on whether Qasim may be
appointed as a replacement director of MCPL.
(10 marks)
Solution:
Under s.180(1) of the Companies Ordinance, 1984 (‘Ordinance’) a director elected under s.178 shall hold offi ce for a period of
three years unless he resigns earlier, becomes disqualifi ed from being a director or otherwise ceases to hold offi ce. Section 180(2)
provides that any casual vacancy occurring among the directors may be fi lled up by the directors and the person so appointed shall
hold offi ce for the remainder of the term of the director in whose place he is appointed. It appears that this power may be exercised
by the directors at any time after the occurrence of the casual vacancy.
On the given facts, Tariq has resigned as a director before the expiry of the three-year term. Contrary to Ali’s statement, the
remaining directors may, acting under s.180(2), appoint a replacement director. Moreover, contrary to Jamal’s proposal regarding an
appointment lasting six months, the replacement director once appointed under s.180(2) shall hold offi ce for the remainder of the
unexpired term of Tariq, i.e. until October 2011 and not for six months. The language of s.180(2) in this respect is mandatory.
As regards appointment of a replacement it must also be noted that the replacement candidate must be eligible in terms of s.187 of
the Ordinance. Section 187(h) provides that no person shall be appointed as a director of a company if he is not a member, except
in situations where he is (i) a person representing the Government, or an institution or authority which is a member; (ii) a whole-time
director who is an employee of the company; (iii) a chief executive; or (iv) a person representing a creditor. On the given facts, the
three members/shareholders of MCPL are Tariq, Jamal and Ali. Since Qasim is not apparently a member/shareholder, it appears that
he may not be eligible to be appointed as a director unless he falls within any of the foregoing exceptions to s.187(h).
Therefore, though the directors may appoint a replacement director (albeit not for six months), Qasim may not be eligible for the
job.
10 Taimoor entered into a contract with Classic Cars Limited (CCL) for sale of a brand new sports car. He gave the car to
his son Rashid on his birthday. The next day, while Rashid was driving the car on the motorway, he saw smoke coming
out of the engine. He called a mechanic. The mechanic examined the car and suggested that the car may have been
a used car and not a brand new one. Taimoor and Rashid are very angry and want to bring legal action against CCL.
Required:
With reference to the law of contract:
(a) advise Taimoor on what legal action he can bring against CCL and the chances of its success; and
(5 marks)
(b) advise Rashid on whether he can bring a legal action against CCL. (5 marks)
(10 marks)
Solution:
(a) It is settled law that if the goods offered are different in quality from those contracted for, or do not conform to the contracted
description, or, if any condition, express or implied, of quality be broken the buyer has the right to refuse them. A defective
delivery stands on the same footing as a non-delivery, and the buyer is entitled to recover damages accordingly (D.B. Walker
& Co v Noor Elahi PLD 1974 Karachi
CCL contracted to sell a brand new sports car but have instead sold a used car. Taimoor may accordingly reject the used car
and bring a claim for damages due to breach of contract by CCL under s.73 of the Contract Act, 1872 (‘Contract Act’). Taimoor
will have to show the existence of the contract, its breach by CCL also the extent of damages suffered (Ahmed Saeed Khan v
MCB Ltd Islamabad
As regards the quantum of damages, under s.73 compensation cannot be give for any remote or indirect loss, but only for loss
or damage which naturally arose in the usual course of things from such breach, or which the parties knew when they made
the contract, to be likely to result from such breach.
In view of the foregoing, the chances of success of Taimoor’s claim are promising.
(b) The doctrine of privity of contract may be stated as follows: a contract cannot (as a general rule) confer rights (MC Chako v
State Bank of Travancore AIR 1970 SC504) or impose obligations (Abdur Rehman Shah v Superintendent of Police – 1999
CLC 855) arising under it on any person except the parties to it. It means that a person cannot acquire rights, or be subjected
to liabilities arising under a contract to which he is not a party. For example, it means that, if A promises B to pay a sum of
money to C, then C cannot sue A for that sum.
On the given facts, the contract for the sale of the sports car is between Taimoor and CCL. They are the two parties privy to
the contract. If there is any breach of the contract by CCL, the party entitled to bring a claim against CCL would be Taimoor
and vice versa. Rashid, on the other hand, is not privy to the contract and therefore, he cannot acquire any rights under the
contract. Therefore, even if there may have been a breach of the contract by CCL, Rashid may not be in a position to bring a
claim for the said breach.
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